By Ian Bremmer
The opinions expressed are his own.
The European Union now faces a sovereign debt crisis that threatens the viability of the entire experiment, one that looms over the economies of even the sturdiest EU countries. Fair or not, debt crises in Greece and Portugal, and the spectre of them in Spain and Italy, have markets questioning whether the eurozone remains viable.
There is some good news. Everyone in Europe, from Germany’s state-level officials to Members of the EU Parliament, takes this issue seriously. The time for kicking the can down the road has passed. The bad news is that the only long-term solution to the crisis is the one that may be a bridge too far for most of the major players: a fiscal union that controls spending across all of the EU’s economies. Fiscal union might sound like a politically impossible concept, but market leaders, like Pimco’s Mohammed El-Erian, are urging Europe to at least consider, ”a unified European balance sheet,” as a logical and badly needed extension of the currency union. To join the euro, governments surrendered control of their monetary policy. Surrendering control of fiscal policy amounts to an enormous psychological step.
A little background: EU member states still control their own spending — and their indebtedness. The EU specifies spending and debt limits for its member nations, but can’t really enforce its guidelines. That’s why Greece was able to hide the problem that too many of its citizens have evaded income taxes for decades, despite the government providing them substantial social benefits. This problem created the country’s debt crisis. Local control of fiscal policy also allowed Portugal to base its budgets on wildly optimistic economic growth projections for years. That’s why the debt crisis spread out of control — every country kept its own books, but few of the strong countries realized that to protect the euro, they would have to bail out weaker countries that rode the economic boom for years—including up to and during the global financial crisis and its aftermath.
Some more background: Soon after the dawn of the euro, as the benefits became clear, European governments were all too eager to join, to enjoy the rising tide, and to abandon their national currencies. This may have been the right economic move, but few of these countries understood the impact of surrendering control of their money supplies. Perhaps they were just too caught up in the long economic boom to care.
Now, in a time of crisis, European governments know exactly what must give up if they are to form a fiscal union. For the greater economic good of the EU—that is, for the good of citizens in other countries—they would have to surrender control of national spending priorities. A piece of their sovereignty would have to be renounced, probably forever. Before the current crisis, this is something most European leaders probably never seriously considered. The signatories to the Maastricht Treaty that created the EU and the conditions for adopting the euro hoped they would never be forced to test the strength of their union. Now, that is exactly what they are being asked to do.